Bankruptcy 101(A): Dissolution & Debt - ABA YLD 101 Practice Series

By Robert C. Gainer

Issues arise when a client comes to you expressing concern that their ex-spouse, or soon to be ex-spouse, is filing for bankruptcy relief.  With the caveat that each case must be examined under the relevant state codes and procedures, what follows is a general guideline to understanding the issues, and pro-actively representing, your client’s interests:

Inventory & Categorize Joint-Debts
What are the debts your client owes jointly with the spouse?  Are their debts your client incurred for the spouse?

  • If your client is not sure what his/her debts are, run a credit report on your client.
  • Alternatively, the filed bankruptcy petition is a public document and can be obtained through CM/ECF in the district the spouse filed for relief, or through a visit to the clerk’s office in the district of filing. 

Recognize that a single individual filing for relief under Chapter 7 of the bankruptcy code will not stop creditors from enforcing judgment against the non-filing spouse if he/she is a co-debtor on the obligation (But See 11 U.S.C. § 1301, stay against co-debtor in a Chapter 13). 

  • What this means to your client is that he/she remain liable on any obligations, e.g. credit cards, that were incurred jointly- and creditors will be able to enforce judgment against your client.  Negotiations regarding the divorce decree should recognize that there is still “joint” debt outstanding- even if that debt is only legally outstanding against your non-filing client. 

When negotiating on the divorce decree, recognize that a goal of the 2005 amendments to the bankruptcy code was to provided increased protection for ex-spouses and children- and that the bankruptcy code gives “domestic support obligation” creditors special protections

  • “Domestic Support Obligation” (DSO) is defined at 11 U.S.C. § 101(14A), incorporating terminology “in the nature of alimony, maintenance, and support...without regard to whether such debt is expressly so designated.”  Id. 
  • The bankruptcy code provides that an individual debtor will not be discharged from any debt for a “DSO.  See 11 U.S.C. § 523(a)(5), But see 11 U.S.C. 523(a)(15). 
  • Debts not in the nature of “alimony, maintenance, and support” may be discharged if those debts fall under the kind specified under 11 U.S.C. § 523(a)(15). 
  • Simply designating in the divorce decree that the obligation by the ex-spouse is in the nature of “alimony, maintenance, and support” may not be sufficient; many courts look to the “form over function” test- specifying that a certain payment by the ex-spouse is for “alimony, maintenance, and support” will not carry the day.

Should an ex-spouse file for bankruptcy, and if the ex-spouse lists your client on Schedule “F” or Schedule “E”, your client should file either: (1) an adversary proceeding to have his/her debt declared non-dischargeable as a DSO or (2) file an adversary proceeding to determine that any and all obligations owed to him/her are of the kind referenced as DSO’s under 11 U.S.C. § 523(a)(5).

While certain exempt property may not be used by the bankruptcy chapter trustee to pay to domestic support obligation creditors, such property is now available to pay the DSO creditor.  The state court or the bankruptcy court may then reduce the claim to a money judgment and enforce such judgment.

These are some general guidelines to protect your client’s interest in prior to, and in the wake of, a bankruptcy filing by a spouse/former spouse.

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